On October 27, 2022, the Securities and Exchange Commission (“SEC”) proposed Rule 206(4)-11 under the Investment Advisers Act of 1940 (“Advisers Act”) which would require SEC registered investment advisers to conduct due diligence prior to engaging service providers that perform certain services or functions (“covered function”).
Observations From Chuck Martin
In reference to the Proposed Rule, Chuck discovered, “one perk of the proposal is that it would codify what responsibilities advisors have under the Investment Company Act toward overseeing service providers.”
Relating to Firms already conducting due diligence of their key vendors, he added, “I think this is kind of codifying an increased risk to the industry with outsourcing and I believe it creates a set of standards that the industry could follow.”
For policies and procedures, he noted, “The rule would not require advisors to have written, explicit policies and procedures related to service provider oversight.” It is important to note that Rule 206(4)-7 would require advisors to have policies and procedures reasonably designed to prevent violations of all finalized rules.
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